Updated October 21, 2026. Quick answer: Publication 925 is the IRS guide to the two rule sets that can limit a loss from a business, rental or other income-producing activity, the passive activity rules and the at-risk rules. The web edition is for 2025 returns. It says the special rental allowance lets you deduct up to $25,000 of loss, reduced by 50% of modified adjusted gross income over $100,000.
Quick reference
| Item | As the IRS publication states it |
|---|---|
| Special allowance for rental real estate loss (Passive Activities) | $25,000 |
| Same allowance, married filing separately and living apart all year | $12,500 |
| Modified adjusted gross income where the allowance starts to shrink | $100,000 |
| Reduction rate for income above that amount | 50% |
| Minimum ownership interest for active participation in a rental | 10% |
| Hours of real property services to qualify as a real estate professional | 750 hours |
What the publication covers
The introduction says “This publication discusses two sets of rules that may limit the amount of your deductible loss from a trade, business, rental, or other income-producing activity.” It adds that “The first part of the publication discusses the passive activity rules.” and “The second part discusses the at-risk rules.” The cover line on the IRS page reads “For use in preparing 2025 Returns”.
The introduction also gives an order of operations: “However, when you figure your allowable losses from any activity, you must apply the at-risk rules before the passive activity rules.”
Parts of the publication in plain words
- Passive Activity Limits: who must use the rules, what a passive activity loss is, and how disallowed deductions carry over.
- Passive Activities: trade or business activities and rental activities, the special rental allowance, and the activities that are not passive.
- Material Participation and Real Estate Professional: the tests for when your involvement makes an activity nonpassive.
- Passive Activity Income and Deductions, and Grouping Your Activities.
- Recharacterization of Passive Income, with Worksheet A and Worksheet B for significant participation passive activities.
- Dispositions, and How To Report Your Passive Activity Loss.
- At-Risk Limits: which activities are covered, at-risk amounts, amounts not at risk, and the recapture rule.
Worksheets and forms it points to
The publication contains Worksheet A, Significant Participation Passive Activities, and Worksheet B, Significant Participation Activities With Net Income. It sends readers to Form 8582 for the passive activity loss and to Form 6198 for the at-risk limit. On this site, see Form 8582, lines 4 to 9, the special allowance, Form 8582, lines 1a to 3 and Form 6198.
The figures that matter
On the general rule, the publication says “Generally, the passive activity loss for the tax year isn’t allowed.”
On the special allowance for rentals, it says “If you or your spouse actively participated in a passive rental real estate activity, the amount of the passive activity loss that is disallowed is decreased and you therefore can deduct up to $25,000 of loss from the activity from your nonpassive income.”
For married taxpayers who file separately, “If you’re married, filing a separate return, and lived apart from your spouse for the entire tax year, your special allowance can’t be more than $12,500.”
On the income phaseout, the text reads “The maximum special allowance of $25,000 ($12,500 for married individuals filing separate returns and living apart at all times during the year) is reduced by 50% of the amount of your modified adjusted gross income that is more than $100,000 ($50,000 if you’re married filing separately).”
On active participation, “You aren’t treated as actively participating in a rental real estate activity unless your interest in the activity (including your spouse’s interest) was at least 10% (by value) of all interests in the activity throughout the year.”
On real estate professionals, the qualifications include “You performed more than 750 hours of services during the tax year in real property trades or businesses in which you materially participated.”
Where it points elsewhere
For the at-risk side, the publication says “Use Form 6198 to figure how much loss from an activity you can deduct.” Rental income and expenses are reported on Schedule E, and this site also covers Schedule E lines 20 to 22, including the loss limits.
Where this comes from
The IRS page About Publication 925 opens with “Publication 925 discusses two sets of rules that may limit the amount of your deductible loss from a trade, business, rental, or other income-producing activity;” It links the PDF and eBook editions and the earlier revisions of the publication.
This page describes the web edition of Publication 925 (2025), Passive Activity and At-Risk Rules, as served on irs.gov on October 21, 2026. The IRS can revise a publication after we read it, and the IRS page controls. General information, not tax or legal advice.
Common mistakes
- Treating the $25,000 rental allowance as available at any income. The publication says it is reduced by 50% of modified adjusted gross income that is more than $100,000.
- Assuming active participation and material participation are the same test. The source gives the rental allowance its own active participation rule, with a 10% interest requirement, and lists separate material participation tests.
- Applying the passive activity rules first. The introduction says “you must apply the at-risk rules before the passive activity rules.”
- Expecting a rental to be nonpassive just because you worked on it. The source says “Generally, rental activities are passive activities even if you materially participated in them.”
Related: IRS publications by number, Form 8582 special allowance for rental real estate, Form 8582 passive activity loss, Form 8582 parts IV and V, Form 6198, Schedule E, and Net investment income tax.
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Answer againSources
- IRS, Publication 925 (2025), Passive Activity and At-Risk Rules (irs.gov): https://www.irs.gov/publications/p925
- IRS, About Publication 925, Passive Activity and At-Risk Rules (irs.gov): https://www.irs.gov/forms-pubs/about-publication-925
Read from the IRS pages linked above on October 21, 2026. General information, not tax or legal advice. The IRS publication and the instructions for your own form control, and your own facts decide the outcome.